Meaning of Analysis of Variance :
Variance means the deviation of the actual cost or actual sales from the standard cost or profit or sales. Calculation of variances is the main object of standard costing. This calculation shows that whether costs are under controlled or not. A variance may be favourable or adverse.
The process of computing the amount of variance and isolate the causes of variances between actual and standard. ‐ C.I.M.A. London
When actual cost is less than standard cost or profit is better than the standard profit, it is known as ‘Favourable Variance’. On the other hand, where the actual cost is more than standard cost or profit is better than the standard profit, it is known as 'Unfavourable Variance' or 'Adverse'. A mere knowledge of the variances is not sufficient and useful to the management; the causes responsible for these variances should also be brought to the knowledge of the management of the business. The process of finding out the causes of the variances and evaluating their effect is regarded as ‘Analysis of Variance.’
A controllable variance is when a variance is treated as the responsibility of a person with the result that his or her degree of efficiency can be reflected in size. When a variance arises due to some unforeseen factors, it is known as uncontrollable variance. The management should look more carefully at controllable variance, for it is these variances that require examination and possible corrective measures. The uncontrollable variances may be ignored.
Importance of Variance:
There is a lot importance of analysis of variance. There are many objects fulfilled with their analysis. Without analysis of variance, there is no use of standard costing. The important points of variances are as under :
1) Check and control of wastage is possible.
2) It improves the efficiency of the organization by the use of standard costing.
3) It exercises control over all cost centers including department, individuals and so on.
4) Responsibility of a particular person or department can be fixed.
5) In the prediction of production cost, sales and profit, variance analysis is very useful.
6) On the basis of variance analysis, delegation of authority could be made effective.
7) Variance analysis is easy to introduce, apply and orient result.
8) Various operational efficiencies can be measured.
Features of Variance:
1) In terms of money: For post office, all the variance are calculated and expressed in terms of money. They are always monetary values in as much as the physical variations are the concern of industrial engineers.
2) Standard item: The minuend should always be the standard item and the subtrahend the actual figure. The remainder between the minuend and the subtrahend is multiplied by the standard index. In fact, minuend is the figure from which something is subtracted and subtrahend is that something which is subtracted from the minuend. In other words if the performance has, on the whole, been costlier, it is unfavourable variance and when it is cheaper than it was envisaged, it is favourable.
3) Budgeted figure : the Minuend: Where the prefix ‘budget’ is used before the variance, the minuend is the budgeted figure based on the normal production. The fixed overhead budget variance is the difference between the budgeted fixed overhead and the actual overhead.